Latest Global Yield Frontiers: Icelandic Sovereigns, Asian Perpetuals

By Michael Aneiro

A pair of stories in today’s Wall Street Journal take us to the latest frontiers of the global hunt for yield. First, Iceland sold euro-denominated bonds for the first time in eight years, the first such sale since the country’s banking system collapsed in 2008. The six-year bonds yielded 2.556% – about a full percentage point higher than six-year Spanish debt, by way of comparison – and while the sale went well, some investors remain wary, as Ben Edwards reports:

[W]hile Iceland’s economy has steadily been improving, capital controls imposed during the crisis to stabilize Iceland’s currency and prevent a flood of cash leaving the country remain in place. That is a worry for some investors. “When the capital controls are lifted, the expectation is that will cause a big currency depreciation as you would assume investors would want to remove locked-down assets,” said Jozsef Szabo, head of Aberdeen Asset Management’s global macro strategy.

If that happens, yields on its foreign currency bonds will shoot higher, reflecting a drop in prices and potentially inflicting hefty mark-to-market losses on investors. The new bond itself isn’t directly affected by the capital controls, which are designed to prevent investors from withdrawing local-currency assets.

The second story takes us to Asia, where a surge in sales of perpetual bonds – risky, high-yielding corporate debt with no maturity date – is raising worries about market froth. Fiona Law reports that recent sellers of such bonds include Australian banks seeking to raise cash to meet new capital rules, as well as blue-chip and state-owned companies in Singapore, Thailand and Hong Kong:

Perpetuals are among the most-volatile bonds and are last to be paid off in a bankruptcy. In returning to these investments, fund managers are showing how hungry they are for high returns as yields on regular bonds trade at near record lows. Some skeptics, though, say investors may be taking on too much risk and are leaving themselves vulnerable to a selloff.

Last year’s sales surge came to an abrupt end when the U.S. Federal Reserve signaled it would cut back on monetary stimulus. Perpetual bonds in Asia were among the biggest losers, plunging as much as 20% and leaving many below their original selling price.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.